Are stocks safer than bonds in the long run?
It is widely accepted that the risk of equities decreases with the investment horizon. Stock markets are very volatile on a day-to-day basis, but in the long run these movements have a tendency to revert to their mean. In other words: stock returns exhibit mean reversion. This phenomenon is – for example – found in historical return data over the past two centuries in the United States. Mean reversion should not be misunderstood to mean that stocks are without risk in the long run. A long-term investor aiming for a safe real return should still invest in index-linked bonds with appropriate time to maturity. However, mean reversion does indicate that very long-term investors like pension funds are able to invest a larger proportion of their portfolio in equities at a given level of risk.
